We’ve “Crossed The Rubicon”: Bear Traps Warns “Risk of A Crash Is Rising”

The comments below are an edited and abridged synopsis of an article by Tyler Durden

Since Fed Chair Powell unleashed his hawkish comments in August, market expectations for the Fed’s terminal rate (cycle high before pause or cuts resume) have surged (adding 100bps of hikes).

We’ve “Crossed The Rubicon”: Bear Traps Warns “Risk of A Crash Is Rising” - BullionBuzz - Nick's Top Six
In 49 BCE, perhaps on January 10, Julius Caesar led a single legion, Legio XIII Gemina, south over the Rubicon from Cisalpine Gaul to Italy to make his way to Rome. Original edition from my own archives Source : Illustrierte Geschichte 1880

However, in the last week—as UK chaos erupted and spread to US equity and bond markets—there has been a dovish shift in market expectations for just how hawkish the Fed will get before everything goes pear-shaped.

Powell’s speech also triggered a drop in equity markets as all hope for a Fed pivot was dashed (prompting the greatest quarterly loss after a 10% rise since 1938).

All of which leads to the latest Bear Traps note by Larry McDonald, who has argued for months that Powell cannot get Fed Funds to 350bps and the belief that the Fed can achieve $1T of QT balance sheet reduction in 12 months is a fantasy.

The Fed is done hiking or close to it. The recent pension blow-up in the UK was excess leverage, and it was an eye opener. But it’s everywhere: There is never just one cockroach.

Academics are waking up to the fact that financial stability risks are trumping inflation risks in a meaningful fashion.

Over the last 10 days, banks have gone from pounding the table on 450-500bps Fed funds to far more focus on US dollar financial stability risks. The risk of a crash is rising.

In the coming weeks, expect a meaningful walk-back from Powell with a focus on financial stability.

The main release valve will be higher hard asset prices, a weaker US dollar, and a strong tailwind for gold miners and emerging market equities.

So, Fed actions have created an unsustainable situation for the markets that will likely prompt the Fed to flip-flop back to easing… but only after crashing further from here.

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